Senator Bob Rucho’s NC “Tax Overhaul” plan

How does Senator Bob Rucho’s NC “Tax Overhaul” plan effect real estate?

As you may have heard, The NC General Assembly will be looking at ways to reform our tax code in 2013. We all want to make sure North Carolina is an attractive place to live and work for many years down the road. I applaud the efforts to support business however we need to ensure there are no unintended consequences to the General Assemblies decisions.

While nothing has been set in stone, Senator Bob Rucho (R-Mecklenburg) will likely propose from the Senate a series of reforms which if voted in would replace the state’s largest revenue source, income tax, with a broader sales tax and business license fee… and as co-chair of the Senate Finance Committee Rucho is leading the charge for the plan with strong Senate GOP support.

Key Components of the Rucho Tax Proposal:

1.       Repeal personal income taxes, currently at 7.75% at the top bracket.

How will this effect real estate? If there is not a total repeal of personal income taxes we believe there will be a cut or repeal to the Mortgage Interest Deduction and the property tax deduction

2.       Repeal Corporate Income Taxes …currently 6.9%

3.       Repeal the current franchise tax, currently at .0015%

4.       Create a new franchise tax (coined the “Business License Tax”) which will be applicable to all business formations. The tax will be 1-1.25% of the value of the firm’s capital stock or a LLC’s owner’s equity with a minimum of $500 a year.

5.       Tax all goods and services at a rate of 8.05%. This would be in addition to current state and local taxes allowed under state law. State sales tax is currently 4.75%

How will this effect real estate?  There will be 168 identified services which will be taxed included are almost all services pertaining to a real estate closing. This tax will cause the price of a closing to increase, making it more difficult for the buyer to afford the home they may want or need to purchase.

6.       Create a statewide Real Estate Transfer Tax of 1% on each closed real estate transaction which would replace the state’s existing Deed Stamp Tax which is currently at .02%.

How will this effect real estate?  This tax will be an additional closing cost for the Seller and will take away equity which has already been squeezed over the past 6 years.

In the fiscal year 2012 $10.27 billion of tax revenue came from personal income tax, $1.1 billion from corporate income taxes, and $5.2 billion from sales and use taxes. This new plan will replace the lost revenues from income taxes with the taxes collected when goods and services are used here in North Carolina.

 PROS:

·         North Carolinians will see more money in their paychecks.

·         The repeal of income tax could create growth as it has in states like Florida, Texas, and Tennessee when they did away with income taxes.

·         It becomes a voluntary tax for the most part, where if you don’t buy something you don’t pay tax.

·         People from outside of the State will also have to pay the tax when they purchase goods or use services here in North Carolina…so they will share in the cost of running the state…and help pay for the roads and utilities they use while here.

·         Everyone pays when they purchase, there is no loop-hole on this one.

CONS:

·         A Sales Tax can be regressive with poorer individuals paying a greater percentage of their income on the necessities of life.

·         It could hurt real estate sales if both MID and property tax deductions are killed, and the 1% Transfer Tax is passed

·         This is a sweeping change and there could be unseen consequences with repealing the vehicle which funds over half of the state’s budget.

 Rucho’s plan does not nibble around the edges of tax reform… it goes right to the very foundation of the system. Rucho was quoted to say “Other proposals failed because we have been narrow minded…you may agree to disagree, but someone has to come up with a better answer.”